Housing industry pros are largely supportive of the raft of changes the Federal Housing Administration made related to the COVID-19 era loss mitigation waterfall.
“The issue is less what they rescinded as it is what they instituted,” said David Dworkin, president and CEO of the National Housing Conference (NHC) in an interview. “What they’ve instituted is a responsible and fair way of addressing the needs of people who are in trouble with their mortgage and can work it out. That’s good for them, for the lender and for the taxpayer.”
The Mortgage Bankers Association (MBA) also said that it “appreciates” the efforts of HUD to address the waterfall, citing the agency’s efforts to protect the Mutual Mortgage Insurance (MMI) Fund.
“Specifically, we appreciate FHA’s efforts to reinstate a cap on the number of times a borrower can utilize a home-retention program and require the successful completion of trial payments to demonstrate long-term affordability,” said Bob Broeksmit, MBA’s president and CEO. “Together, these safeguards will improve sustainability, protect the FHA insurance fund, preserve borrower equity, and further align FHA with the GSEs.”
Acknowledging current realities
Broeksmit added that FHA’s approach “appropriately balances borrower access to streamlined loss mitigation with prudent risk management,” and that it looked forward to advocating for continued efficiency in mortgage servicing.
Matt Tully, chief compliance officer at Sagent, said that mortgage loss mitigation standards are now being brought back to “a pre-COVID state,” and that FHA is acknowledging that the market has adjusted to current realities.
“During COVID, extended forbearance was needed, and some of these policies were made permanent in post-COVID years until now,” Tully said. “[Tuesday’s] FHA action acknowledges that the market has normalized and seeks to balance homeowner hardship relief with an FHA MMI fund that’s stable over the long-term.”
Regarding one change that will now allow for one permanent loss mitigation option every 24 months instead of every 18 months, Tully said that such eligibility “is still favorable” for any borrower who becomes strained.
Scott Olson, executive director of the Community Home Lenders of America (CHLA), said that the action appropriately recognizes that COVID-era practices are not representative of current realities.
“Just as the country has moved beyond COVID, it is time for FHA to move beyond the 2020 COVID loss mitigation framework,” he said. “Homeownership retention programs must achieve an appropriate balance between the objectives of keeping families in their home and protecting the safety and soundness of FHA. The changes FHA is making will help achieve this balance.”
However, the timeline of the changes was less than ideal for Courtney Thompson, EVP of servicing at CMG Financial.
“From a pure operations or supporting technology perspective, it’s a bit uncouth to update a series of rules, after a period of uncertainty, and also shorten the time period to implement the same rules,” she said. “But this is pretty standard issue in the loss mitigation space — never a dull moment. Loss mitigation operators are heroes and will be ready—because they don’t have a choice.”
MMI Fund, risk management
Dworkin said that the program changes can do more to address distressed borrowers moving in and out of the waterfall.
“What [the changes don’t] do is allow for a recycling of people through the system who just aren’t able to get back on track, which is bad for the taxpayer,” he said. “It’s not good for the person who is in trouble because it delays their moving on, and it’s particularly bad for the people who need FHA mortgages, who depend on the program and are paying on time.”
When the cost of modifying mortgages is increased continuously, this serves to discourage lenders from making these kinds of loans in the first place, he added.
“We’ve seen that with banks who have exited the FHA market during COVID,” he said. “We needed to take extraordinary measures, but that’s already years ago. Now, what FHA has done is they’ve made permanent the best parts of the COVID loss mitigation waterfall and ended the parts that have been the most problematic. We’re very supportive.”
One of the core reasons for the change, according to FHA, was to further protect the MMI Fund from losses despite it being in very good financial condition based on the most recent data. Dworkin acknowledged that, but said the guidance is still necessary for thinking ahead to a point where that may not be the case.
“I’d much rather the department perform risk management than crisis management, and part of that means they have to pay attention to problems before they become crises,” he said. “This is an example of a long-term investment in, and maintaining, the health of the fund. Given that we’re five years removed from the pandemic outbreak, and three years removed from it being pretty reasonably under control, it’s the right thing to do.”
Dworkin added that he’s not concerned about the health of the MMI Fund at the moment, but is concerned “anytime we take it for granted,” he said. And I think what’s happened in this decision is that HUD has said they’re not going to take it for granted, and that they’re going to do what’s responsible in the long run by not waiting for a crisis. Instead, they want to avoid one, and I think that makes a lot of sense.”
James Kleimann contributed reporting.